Eurico J. Ferreira

Stock price reactions to recommendations in the Wall Street Journal “Small Stock Focus” column

Abstract This paper examines the information content of the “Small Stock Focus” column in the Wall Street Journal. The paper contributes to the literature by examining a source of secondary information that is readily available on a daily basis but has not been investigated. The results for the second half of 1993 suggest that the column tends to focus on stocks that have very large price changes, with an average absolute value that is more than 9%, on the day prior to the column publication date. Many of the companies appearing in the column appeared more than once in the six-month period covered by the study. The results are mixed with the strongest information content being associated with the good news, non-repeating observations. When repeat observations for the same company were excluded for the good news events, the AR0 was 80 basis points and statistically significant and the CAR for days 1 through 5 was −1.61% and statistically significant. The volume analysis indicated that the non-repeating observations generally had a lower trading volume and larger AR-1 than the repeating observations, suggesting that there is more information content for the less actively traded securities.

Evidence on equity private placements and going-out-of-business information release

Abstract In our study, shareholder wealth gains around announcements of equity private placements primarily came from firms which subsequently went out of business. Investors’ positive response was consistent with an expected greater survival likelihood for more troubled firms, but with no such revisions for stronger companies. Inconsistent with their apparent beliefs, going-out-of-business companies had statistically significant and material negative abnormal returns that averaged 17.5% from prior to and until 150 days after the announcement period. Still-in-business companies had insignificant abnormal returns over either the announcement or post announcement period. The evidence on failing businesses is consistent with a semi-strong form of efficient markets hypothesis violation.

Effect of Reg FD on Information in Analysts’ Rating Changes

A rich literature examines the effects of analysts’ recommendations on stock prices, and literature is developing on the effect of Regulation Fair Disclosure on the information associated with corporate earnings forecasts and announcements. This study examines the effect of Reg FD on the information content of analysts’ rating changes. Based on recommendations associated with a random sample of S&P 500 Index stocks, the major finding is that investors have been responding to analysts’ recommendations in the same way since Reg FD as they did before implementation of Reg FD. In addition, the results suggest that Reg FD does not require that practitioners change the way they view the analyst recommendation process. The U.S. SEC’s Regulation Fair Disclosure was first drafted in December 1999, was released in August 2000, and became effective on 23 October 2000. Reg FD was designed to eliminate “selective disclosure” that operated between the company and its analysts or institutional investors. Selective disclosure occurs when a company releases material nonpublic information to specific groups at different times. The practitioner media have extensively discussed the effects of Reg FD on the behavior of corporate financial officers and their interactions with stock analysts and on the analyses carried out by the analysts. In addition, a growing number of academic studies have focused on the effect of Reg FD on earnings announcements or analysts’ earnings forecasts. A rich literature also examines the effects of analyst recommendations on stock prices. This study contributes to the literature by examining the effect of Reg FD on the information content of analysts’ changes in recommendations between a preregulation period (1 August 1999 to 31 July 2000) and a postregulation period (1 January 2001 to 31 December 2001). We used a large sample of upgrade and downgrade recommendations for a random sample of 167 S&P 500 Index stocks. We compared stock reactions (price and volume) to upgrades and downgrades in the preregulation period with reactions in the postregulation period. The analyst recommendations fell into 14 action levels, which could be grouped into five categories: 1 = strong buy, 2 = buy, 3 = market outperformance, 4 = hold, and 5 = sell. With respect to downgrades, the overall results in the form of price impact for the announcement day were negative and significant in the pre- and postregulation periods. The change in the effect of Reg FD in the postregulation period, however, varied by action level (but at the action level, samples were small). The overall conclusion is that there has been no Reg FD impact on downgrades. With respect to upgrades, the overall results in the form of price impact for the announcement day were significant in the pre- and postregulation periods, but we found no significant difference between the effect by period. Reg FD does not appear to have affected the impact of upgrades on stock prices. The volume associated with a rating change, as measured by abnormal volume, declined after Reg FD was implemented. The sample of 2,247 observations included 1,329 observations of single actions and 918 observations of multiple recommendations—that is, several actions recommended for the same stock simultaneously on Day 0 or a few days apart within the Day –4 to Day +4 announcement period. Moreover, the initial analyses did not consider the effect of decimalization of the U.S. exchanges, which occurred in the period studied (for the NYSE and Amex, 19 January 2001; for NASDAQ, 9 April 2001). These factors were controlled for in further tests. We used regression analyses to examine the effects of the multiple same-day and overlapping recommendations and decimalization on stock prices in the pre- and postregulation periods. The multiple same-day recommendations were found to be statistically significant control variables and increased the magnitude of the average prediction errors on the announcement day. Downgrades had a much larger impact on abnormal returns than upgrades. The decimalization variables were not significant but did pose a problem in estimating the value of the variable to test for a change in the impact of Reg FD on the value of analysts’ rating changes after the implementation of Reg FD on 23 October 2000. The coefficient for this variable was negative but insignificant. The major finding of this study is that investors continue to respond to analysts’ recommendations in the same way after the implementation of Reg FD as they did before its implementation. Given the lack of a significant change in the impact of recommendation changes on stock prices, the results do not require practitioners to change the way they view the analyst recommendation process.

The information content of Morningstar StockInvestor: the Tortoise vs the Hare

Purpose – The purpose of this paper is to add to the literature on the impact of the Morningstar ratings by examining the impact of individual stock ratings in the Hare and Tortoise portfolios. Design/methodology/approach – This study uses an event study approach, where the effect of the information release on stock prices was examined. Findings – The release of the Hare and the Tortoise portfolios does have a significant impact on the stock prices on the day before the release of the reports. The significant impact of the Hare portfolio appears to be related to risk and growth factors and the new listing of a stock in the portfolio. The significant impact of the Tortoise portfolio appears to be related to growth and a downgrading of the estimated value. Originality/value – There have been numerous studies on the impact of the Morningstar ratings on mutual funds. This paper adds to that literature by examining the impact of individual stock ratings in the Hare and Tortoise portfolios.

Investor Equity Private Placement Value Misconceptions: Real and Imagined Operating Flow Determinants

We examine the equity private placement pre- and post-announcement relationship between stock market and operating performance, and how this is impacted by the issuing company’s characteristics. Outside public investors mainly misconstrue the information available at the announcement date, contributing to an unsound announcement price overvaluation. Almost all characteristics related to announcement date abnormal stock returns differ from those related to post-issue stock and operating performance. Results are consistent with outside investors being over-optimistic, using unsound naïve valuation models prior to and at the announcement of equity private placements, and losing wealth thereafter. Alternatively, private investors’ decision to invest in private placements is rational, results in reasonable returns on their investments, and is consistent with providing needed resources for the companies so that they can maintain competitive operating performance levels.

Measuring Private Equity Stock Reactions

This article presents preliminary evidence on the ability of an adjusted AR to enhance the materiality and significance levels in AR-based event studies. A case example of differences between the standard AR measure used in most event studies and the adjusted AR is provided. In tests of 240 equity private placements of publicly held companies between 1983 and 1996, the adjusted AR measure dominates the standard AR measure across various sample sizes. As the sample size decreases, the adjusted measure retains the ability to detect material and significant price increases while the standard AR measures ability declines.

Current and Private Investors' Return and Risk Sharing with Private Equity Offering Announcements

Private equity investors receive two-thirds of the announcement wealth gain at private equity offering announcements before netting out their costs and required risk premiums during 1983–1996. The existing investors, facing no marginal costs and a reduction in risk from a less financially leveraged company, have a free ride and gain one-third of the wealth effect. Announcement returns are highest to private investors when both the private and public equity issuance market climates are normal while the poorest occur in cold EPP markets. The average announcement period return to private investors is still reasonably large under all issuance climates.